You Need to Stick with the Cheap Retailers

The retail sector continues to show decent growth, which is encouraging given the lack of strong jobs growth. The improvement in the housing market is helping to add some confidence to consumer spending and the retail sector. Retail sales in December grew 0.5%, above the 0.4% estimate made by Briefing.com. On an ex-auto basis, sales grew at 0.3%, which was the same as November, but below the Briefing.com estimate of 0.5%.

The results in the retail sector are decent but not stellar, as there’s still a hesitancy to spend, at least at non-discounted prices.

lululemon athletica inc. (NASDAQ/LULU) fell nearly four percent on January 10 after the fashionable maker of athletic clothing made a downward revision in its sales guidance.

Discounter Target Corporation (NYSE/TGT) reported flat sales in December, which is a disappointment, given the hope placed on the holiday shopping season, when some retailers can generate up to 40% of total annual sales.

I believe the department stores and some of the specialty retailers will fare well. The key to success in the retail sector is selective picking. I would stay away from J. C. Penney Company, Inc. (NYSE/JCP) as the company tries to restructure out of its mess.

My advice is to continue to stick with the leading discount bellwether retail stocks. In the large-cap retail sector area, the top companies are Wal-Mart Stores, Inc. (NYSE/WMT), Target, and Costco Wholesale Corporation (NASDAQ/COST).

The king of the big-box stores continues to be Costco, which reported a stronger-than-expected nine-percent jump in its key same-store sales reading in December. (Source: “Costco December same-store sales up 9 percent,” Reuters, January 3, 2013.)

The results continue to show steady growth; but for that extra bit of growth, you should look at the smaller discount companies in the retail sector.

Costco, for instance, has a market cap of $44.0 billion and is estimated by Thomson Financial to report sales growth of 7.4% and 8.5% for the 2013 and 2014 fiscal years, respectively.

By comparison, take a look at mid-cap PriceSmart, Inc. (NASDAQ/PSMT), an operator of warehouse clubs in 12 countries in Central America and the Caribbean.

Consider the comparative sales growth for PriceSmart by Thomson Financial, which is 13.6% and 15.4% for FY13 and FY14, respectively—higher than Costco. The growth estimates are probably conservative and could really take off if the expansion continues.

The chart below shows a plateau and sideways trading. Be careful of the downside risk.

Chart courtesy of www.StockCharts.com

Another interesting discounter is large-cap Dollar General Corporation (NYSE/DG), which operates over 10,000 stores across 40 states. For investors looking at the retail sector, Dollar General has reasonable valuation and above-average long-term price appreciation potential.

And when the housing market and job numbers pick up, I expect spending in the retail sector to continue to increase, especially on non-essential goods and services.

My favorite in the retail sector continues to be the discounters and big-box stores. The big-box stores are now selling a broad range of electronics, and they are adding to their product line, offering consumers a one-stop place for shopping and creating higher revenue flow.

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